Cut costs by trimming the number of your suppliers. Heard it before? It's the business equivalent of "diet and exercise." But paring down to just a few suppliers can be too much of a good thing. The Hackett Group, an Atlanta-based business-advisory firm, says that many leading companies are actually adding suppliers. Why? To mitigate risk.
"If you have only one supplier in a key category, that's undue risk," observes Chris Sawchuk, a senior business adviser at Hackett. "If that supplier goes under, you're dead." Instead, Sawchuk advises companies to give favored suppliers 80 percent of their business and backup vendors 20 percent. While the strategy will cost a little on pricing, "you'll remove risk from your equation and feel less at the mercy of your top supplier," he says.
In the wake of the SARS scare and 9/11, some companies learned the lessons of having too few suppliers the hard way. For this reason, leading companies in procurement, as identified by Hackett, slightly increased the number of suppliers they use during the past few years. "Most companies still have too many suppliers," says Richard T. Roth, chief research officer at Hackett. But the companies that were ahead of the curve are coming back a little, he says.
Not Stratasys, a $51 million company in Eden Prairie, Minn. The maker of plastic prototypes for the aerospace, automotive, and medical industries relies on just one supplier for some of its critical materials. Stratasys CFO Thomas Stenoien says that doing so allows it to have more control over the quality of its products and helps build a long-term relationship with suppliers. Yes, there's risk in relying on one supplier, he concedes, "but if you introduce defects into the products and have failures in the field, that's expensive, too." (In some areas, Stratasys does employ the 80/20 rule.)
Increasing the number of vendors in order to reduce risk pertains only to key suppliers, Hackett points out. When it comes to items like office supplies, reduction is still the way to go.
And reducing suppliers isn't the only way to lower risk. Stratasys, for example, makes sure its vendors have emergency capabilities.